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If some conditions are met (stop loss, trailing stop, take profit...) we will close ours positions (sell/buy) to avoid having more loss or to ensure profit. In an automatic trading system, it is easy to set-up these rules.

But is there an automated strategy / rule to re-activate our strategies? For example:

  • simulate our P&L if we have no risk management rule; and then reactivate ours positions if the simulated drawdown or run up reaches a certain value
  • reactivate after two days
  • reactivate at the end of the current month?

Or is this part of an "automated" trading in fact manually done?

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I strongly assume you are talking about a simulated environment, only. Risk management rules are there for a purpose, adhere to them or throw them overboard entirely at your own peril. Having said that if you want to purely simulate how P&L, equity curve, and draw-down among others would have behaved had you not squared the positions due to targets or stops reached then you could do the following:

Simply run identical strategies in parallel, same strategy logic inside except that one generates orders with attached targets and stops and the other generates orders without the bracket order. In that sense you will generate the same trade entries (given you are not subjecting your system to constraints that would prevent the system from generating orders because certain risk limits would otherwise be breached) but the exits will be different.

However, in the end you still need to set a mechanism of how to close positions.

If you are merely after investigating how P&L had traversed n-time units post the trade closure, given the trade was not closed, then there are way easier things to run for example in R.

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  • $\begingroup$ I think the question was pointing into a different direction. The rules to close the positions are there but when to open them again? I guess this is a very general question (and old) question. To my mind, almost any rule will do - but you should have one. If one has a rule which tells when to close a position one should also have a rule which tells when to open one. Examples of the latter rules where the question here. $\endgroup$
    – vanguard2k
    Dec 27 '12 at 8:51
  • $\begingroup$ @vanguard2k, well I am confused then. "Re-activate" as the OP stated in my book does not ask for rules when to open a position. Re-open positions in my world does not exist. There are rules when to open positions. If different rules are supposed to be applied then a new strategy with the different rules should be run in parallel (I touched on it above though you are right, if its about rules of opening positions then I may want to edit my response). OP can you please clarify? $\endgroup$
    – Matt
    Dec 27 '12 at 10:55
  • $\begingroup$ Yes my question is in fact when we have a risk management strategy running in parallel of a trading strategy. The trading strategy will take some positions, and the risk management can cancel them to ensure to "take profit", or to "stop loss",... There is a lot of documentation about theses "stop" rules. But none about how to open the trading strategy signals again (after touching a risk management threshold). As if the risk management will open or close a water tap (where water is the trading strategy signals). $\endgroup$
    – Alexxx
    Jan 3 '13 at 10:38
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    $\begingroup$ @Alexxx, I suggest you look at this approach from the incorrect perspective. A trading strategy does what a strategy does: It generates trading signals. A risk management module (or whatever you call it) is taking care of cutting positions however you like to prescribe the timing and fashion of squaring positions. Let each entity do that it does best. Why would you want to "re-open" a trade? The trade was invalidated otherwise why would you have your risk entity take off the trade? Wait for the next signal I would say. $\endgroup$
    – Matt
    Jan 3 '13 at 10:43
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I agree with @Freddy, that we are talking about backtesting trading strategy in simulation environment.

Somehow you opened those positions - that means you have some trading strategy, the strategy which gives you enter (and probably exit) signals. There are two cases:

  1. You CAN formalize and automate this strategy.
  2. You CAN'T do it for any reasons.

(1) What you are doing in the first case: is getting some trading simulation software (like Amibroker) or develop some backtesting utility yourself. And simply overlie your trading strategy signals with different risk management indicators (trailing stops or some bands) and get optimal stop values.

(2) Use a set of historic trades which you already did as an input for simulation tool. And again run it with trailing stops.

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